Monetary policies of the ECB and US Fed can be characterised by ?Taylor
rules?, that is both central banks seem to be setting rates by taking into account
the ?output gap? and inflation. We also set up and tested Taylor rules which
incorporate money growth and the euro-dollar exchange rate, thereby improving
the ?fit? between actual and Taylor rule based rates. In general, Taylor rules
appear to be a much better way of describing Fed policy than ECB policy.
Simulations suggest that the ECB?s short-term interest rates have been at a much
lower level in the last two years compared with what a Taylor rule would suggest.